Pension Rebates Review

– in the House of Commons am 4:22 pm ar 27 Chwefror 1992.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Photo of Mr Tony Newton Mr Tony Newton , Braintree 4:22, 27 Chwefror 1992

With permission, I wish to make a statement on the outcome of the regular five-yearly review on the level of national insurance rebates for people contracting out of the state earnings-related pension scheme—SERPS—and on our plans to build on the huge success of personal pensions introduced in 1988 in extending individual choice, opportunity and ownership.

In respect of the contracted-out rebates, I have today laid the relevant reports by the Government Actuary and myself, with a draft amending order and regulations, to establish the level of rebates for the period beginning in April 1993, which need to be set within the present financial year in accordance with the Social Security Pensions Act 1975 and the Social Security Act 1986.

As the House knows, employment which is contracted out of SERPS attracts a rebate on class 1 national insurance contributions. For the five years from April 1988 to April 1993, it is set at 5·8 per cent. of earnings between the lower and upper earnings limits—2 per cent. on the employee's contributions and 3·8 per cent. on the employer's. The rebate is based on the cost to salary-related occupational pension schemes of providing the guaranteed minimum pension which such schemes must provide as the condition of contracting out.

An additional 2 per cent. incentive is payable from the national insurance fund to people in occupational pension schemes which newly contract out of SERPS between 1988 and 1993 and to people who contract out of SERPS in favour of a personal pension. That 2 per cent. incentive ends in April 1993.

The level of rebate required to provide guaranteed minimum pensions in contracted-out schemes is, naturally, falling, because the cost of the transitional arrangements that we introduced for older employees as part of our 1988 pensions reforms reduces in each new quinquennium as those people reach pension age. In the consultation paper issued last autumn, the Government Actuary indicated his initial view that the appropriate rate for 1993 to 1998 would be 4·68 per cent. In his final report to me, following extensive consultation, he has concluded that the range of uncertainties caused by the European Court of Justice Barber judgment concerning equal treatment in occupational pension schemes, which will take some time to resolve, make it more sensible for the rebate level to be based on the costs for the first three years of the period only, which he assesses at 4·77 per cent.

I accept his view and his recommended figure, subject only to rounding the figure to 4·8 per cent. Accordingly the regulations laid today provide for a rebate at that level from April 1993. I propose that it should be split 1·8 per cent. for employees and 3 per cent. for employers.

In my statement to the House about the Barber judgment on 26 June last year, I said that we would be consulting the pensions industry and other interested parties on the implications of equal treatment for the current arrangements for contracting out. Those consultations are under way, and it is clear that changes will be needed to the basis on which pension schemes can contract out of SERPS. In considering what those changes should be, we intend now to give particular consideration to the scope for moving from flat-rate rebates to rebates related to age, at least for personal pensions and possibly also for other contracted-out schemes. Decisions on how to achieve equality in state pension age, on which I published a discussion paper in December, will also have an important bearing on the many complex and detailed issues which will need to be resolved.

In carrying forward this work, our aim will be to ensure a sound basis for the continued operation and development of salary-related schemes and to expand further the new opportunities for millions of people created by our changes in the 1980s, which opened the way to contracted-out money purchase schemes and personal pensions and gave greater scope for individuals to enhance their retirement provision with additional voluntary contributions.

Personal pensions in particular have proved an outstanding success. More than 4·6 million people have chosen to save for their retirement by contracting out of SERPS in that way, taking advantage of the choice, flexibility and portability which such pensions can provide. Many of them would not have had access to an occupational scheme, and they also include many who would not previously have planned ahead for retirement in this way.

The flat-rate nature of the rebate has, however, meant that the advantages of personal pensions have been greater for younger people than for older ones. As I said earlier in my statement, we intend to examine the scope for age-related rebates more generally. Meanwhile, however, we have decided that it would be right to take an early step in that direction in relation to personal pensions. Accordingly, we propose that from April 1993 there should be an age-related additional rebate of 1 per cent. over and above the basic 4·8 per cent. contracted-out rebate for personal pension holders aged 30 or over.

This is a further important step in encouraging the development of personal saving for retirement. Coupled with our firm and continuing commitment to the basic rate retirement pension, protected in value, it will, I believe, be welcomed in the House and outside.

Photo of Michael Meacher Michael Meacher Shadow Secretary of State for Work and Pensions

Will the Secretary of State tell the House what he pointedly omitted to tell it? What is the cost of the 1 per cent. bribe for private pensions which he is announcing for people aged 30 or more who will be given age-related rebates? Will he confirm that the bribe will cost about £600 million over five years, which is equivalent to more than £350 for every pensioner on income support?

Will the Secretary of State also confirm that the whole package will cost £7·1 billion of taxpayers' money now in order to save about £4 billion in reduced benefits at some stage in the next century, so the net cost is more than £3 billion, which is equal to £300 for every pensioner in the land? Why did not the right hon. Gentleman's statement acknowledge that the National Audit Office and the Public Accounts Committee have strongly condemned—[Interruption.] I notice that Conservative Members do not like to be reminded of the degree of the bribe being given by the Government in this pre-election period or of the losses to ordinary pensioners.

Will the Secretary of State confirm that the National Audit Office and the Public Accounts Committee have strongly condemned him for wasting nearly £9·5 billion of public money in the past five years in order to save only £3·5 billion in reduced benefits, and for losing another £800 million in tax revenue? Will he confirm that he was also castigated for so depleting the national insurance fund by those manoeuvres that he has had to transfer nearly £2 billion of national insurance expenditure to general taxation, and that that is the equivalent of about 1½p on the basic rate of tax?

Is not it clear that, not only in the Budget but 12 days beforehand, the Government are hell-bent on bribing people with everyone else's money—including that of the poorest people? The Government say that they believe in choice, but is not it clear that they choose sweeteners for a select group of private pensioners at the expense of nearly 2 million of today's pensioners who are left in poverty? How can the Secretary of State justify spending £600 million on private pensions when an ordinary single pensioner has seen his or her pension cut by more than £17 a week, compared with Labour's earnings formula?

Why does the right hon. Gentleman feel that it is so necessary to bribe people to join private pension schemes? Is it because private pensions cannot compete with occupational pensions or with SERPS? Why does not the right hon. Gentleman treat SERPS, occupational pensions and private pensions on a fair and equal basis, so that people can choose the best value for money, rather than being manipulated into the Government's preferred ideological option?

Before the Secretary of State asks what Labour will do, I shall tell him that we shall abolish the current 2 per cent. bribe, and that we shall not implement the new I per cent. bribe in April 1993. Our priority is today's pensioners, who are in far greater need and who have been treated so shabbily by the Government for the past 13 years.

The Government's package is an abuse of public funds. It bribes people to join expensive and highly risky private pension schemes and cheats today's pensioners of money that they need. They have a right to that money, and we shall ensure that they get it.

Photo of Mr Tony Newton Mr Tony Newton , Braintree

The hon. Gentleman's last remarks did not surprise me in the least. They were absolutely in line with his party's relentless hostility to almost every extension of choice and ownership, whether in housing, in shares or, as now, in pensions. More to the point, I should like to know what the hon. Gentleman means by saying that he would abolish the 2 per cent. incentive. That is due to come to an end at the end of the forthcoming financial year in any event. He could abolish it, and change the status quo, only by taking away commitments that have already been made and taken into account in existing pension contracts, thus retrospectively disturbing arrangements that people had already entered. I hope that the hon. Gentleman will wish to clarify that matter at some stage.

I cannot confirm, because I do not fully recognise some of the figures that the hon. Gentleman used, what he said about the cost to the national insurance fund. However, I can tell him that as a result of the rebate which I have announced—the basic rebate from April 1993, combined with the disappearance of the 2 per cent. incentive and the addition of the 1 per cent. age-related addition for people over 30—there will be a substantial reduction in expenditure on rebates from the national insurance fund, arising principally, of course, from the reduction in the basic contracted-out rebate.

The last point on which I want to touch goes to the heart of the hon. Gentleman's comments and his hostility to the rebate system. The figures that he uses persistently include the basic contracted-out rebate as well as the personal pensions incentive——

Photo of Mr Tony Newton Mr Tony Newton , Braintree

I heard that. I wonder whether the hon. Gentleman has read what the Institute of Fiscal Studies —usually one of his favourite bodies—said last week about the NAO report: The majority of the cost of personal pensions arose from the cost of the contracted-out rebate"— the basic rebate introduced by the Labour Government in the mid-1970s. The institute continued: An obvious corollary of the NAO's argument that the cost of personal pensions was excessive is that the cost to the National Insurance Fund of rebates to occupational pension schemes is also excessive. If, as I suspect, that is the hon. Gentleman's view, he should come clean. He will not be happy until there is no alternative to state provision and whatever the state decides to provide.

Several Hon. Members:


Photo of Mr Bernard Weatherill Mr Bernard Weatherill , Croydon North East

Order. I know that this is an important statement, but we have an equally important debate on Welsh affairs today. I will allow questions to go on until 4.55 pm; then we really must move on because I will have to put a limit on speeches in any event in the Welsh debate.

Photo of Mr Robert McCrindle Mr Robert McCrindle , Brentwood and Ongar

Is not it clear that personal pensions represent one of the greatest successes of the Government, and that as a result of their introduction millions of our fellow citizens enjoy the prospect of a very good pension? That has been brought about by the incentives that are so deplored by the Opposition. My right hon. Friend will find that there are many Conservative Members sitting behind him who will warmly endorse what he has done in the past and even more warmly endorse today's news that the 1 per cent. rebate will apply on an age-related basis.

Finally, is not it clear from what the hon. Member for Oldham, West (Mr. Meacher) said that the millions of people who have become holders of personal pensions over the past few years will wish to know whether his remarks imply that there is to be some retrospective action by an incoming Labour Government which would not only show Labour's well-known opposition to the concept of personal pensions but put in jeopardy the pensions which have been built up over the past five years?

Photo of Mr Tony Newton Mr Tony Newton , Braintree

Taking my hon. Friend's last point first, it is certainly true, if the words of the hon. Member for Oldham, West (Mr. Meacher) meant what they appeared to mean, that they would involve depriving average personal pension holders of about £5 a week of contributions to their personal pensions which they have already committed.

Photo of Mr Tony Newton Mr Tony Newton , Braintree

I take that sedentary observation as confirming what I say—it is precisely the commitment made in the last shadow Budget. We all wait with bated breath for the next shadow Budget.

I am grateful for my hon. Friend's earlier observations, which were entirely true. We have enabled millions of people who were not in occupational pension schemes to embark on a new form of saving for their retirement, a form which gives them greater flexibility and choice. What is more, there are some signs, admittedly from limited survey information, that about 40 per cent. of those people are putting more than the rebate into their personal pension schemes. In other words, this has had an important effect in stimulating personal saving for retirement.

Photo of Mr Archy Kirkwood Mr Archy Kirkwood Liberal Democrat Chief Whip

The Secretary of State knows that I do not share the hostility emanating from the Opposition Front-Bench spokesman, the hon. Member for Oldham, West (Mr. Meacher), to private pensions. But may I repeat the question that the hon. Gentleman sought to ask? What is the Government Actuary's assessment of the cost of the 1 per cent. additional rebate? I well understand the reason for trying to include an age-related element, but, without the 1 per cent., would not that have been equally possible by using a figure of less than 4·8 per cent. for those under 30 and more than 4 per cent. for those over 30?

Photo of Mr Tony Newton Mr Tony Newton , Braintree

The estimate of the cost to the national insurance fund of the 1 per cent. additional rebate that I have proposed is about £175 million a year. Against that, savings of the better part of £2 billion a year will arise from the other changes which I announced today—including my confirmation of the fact that the 2 per cent. incentive will disappear in April 1993. I hope that that is reasonably clear.

On the wider point that the hon. Gentleman raised, I reiterate that I am grateful for his general support for extending choice and opportunity in the way that we have sought to do.

Photo of Mr Anthony Nelson Mr Anthony Nelson , Chichester

If the growing number of elderly people are to be assured of a decent pension in future without placing an impossible taxation burden on the rest of the work force, bearing in mind that pensions are paid for on an annual basis, is not it essential that personal pension provision is increased and is not it right that the Government have come forward with this welcome statement, which amounts not to a bribe but to a much-needed bonus for self-reliance and self-provision?

Photo of Mr Tony Newton Mr Tony Newton , Braintree

Yes. I obviously very much agree with my hon. Friend. The fact that 4·5 million of our fellow citizens have taken advantage of those opportunities, together with many more in company-operated money purchase schemes—of which 20,000 have been created since 1988 —shows that that is meeting a widespread wish for people to make more choices for themselves and to have more say over their own provision for retirement. That will be welcomed generally almost everywhere, except among Opposition Front-Bench Members, as a sensible way to proceed.

Photo of Frank Field Frank Field , Birkenhead

As someone who is committed to free choice—whether to belong to one's trade union at GCHQ, to buy one's own council house or to have control over one's pension assets—may I return the Secretary of State to the costs of the proposals? What was the cost in respect of the national insurance fund of the rebate during the first five years and what is it in the second five years? Or, in this pre-election period, is the statement that there is no such thing as a free lunch being put to one side?

Photo of Mr Tony Newton Mr Tony Newton , Braintree

I have given the figures requested by the hon. Member for Roxburgh and Berwickshire (Mr. Kirkwood). The House must focus on the extent to which, as a result of the kick-start that we have provided through the incentive introduced in 1988, there has been a massive expansion in the number of people saving for their own retirement and, as I said a moment ago, many people now put in more money than they receive from the rebate itself. I have no doubt that that is in the interests of the development of a sound, long-term structure for pension provision, for reasons that were made clear in the supplementary question asked by my hon. Friend the Member for Chichester (Mr. Nelson).

Photo of Mr Patrick Nicholls Mr Patrick Nicholls , Teignbridge

Does my right hon. Friend agree that, when those people who are thinking of contracting out consider the exchanges that have taken place in the House today, they would do well to bear in mind that the hon. Member for Oldham, West (Mr. Meacher) was quoted in The Star on 28 August 1991 as saying that there was no way in which any political party would commit itself to a common retirement age of 60 because the cost would be enormous? Does not that show that when the hon. Member for Oldham, West has a choice between common sense and party dogma, at the end of the day, he will always opt for party dogma?

Photo of Mr Tony Newton Mr Tony Newton , Braintree

I can confirm that. If we had required confirmation other than from me—and I suppose that people might expect me to confirm that—that was all too clear in the response of the hon. Member for Oldham, West to my statement this afternoon.

Photo of David Winnick David Winnick , Walsall North

Is the Secretary of State aware that the erosion and undermining of SERPS have caused immense damage to those who will retire in future and will undoubtedly mean that, despite what he has said, many people will have to live in poverty unless —as we hope—a Labour Government reverse what he has done? Is there not a lesson to be learnt from what has happened with the Mirror pension scheme which is, admittedly, an occupational scheme? Theft and swindle in that scheme have meant that many pensioners simply do not know whether they will have a decent retirement. What has happened could happen elsewhere in occupational pension schemes or in the kind of schemes to which the Secretary of State referred.

Photo of Mr Tony Newton Mr Tony Newton , Braintree

I do not accept either of those points. The changes that we made to SERPS in 1988 were a necessary part of putting pension provision on a basis that was sound for the future and that was likely to be affordable by future generations. The worst thing one can do in respect of pensions is to make promises, upon which people rely, about what would be paid in 30 or 40 years time, but which prove to be unsustainable.

If I understood the other part of the hon. Gentleman's question alright, where people are members of a contracted-out scheme whereby the undertaking is to ensure guaranteed minimum pensions, in the relevant circumstances such schemes are underwritten by the state.

Photo of Mr Michael Irvine Mr Michael Irvine , Ipswich

Does my right hon. Friend agree that, in the light of the appalling fraud perpetrated on the pensioners of the Maxwell-controlled companies, the case for personal pensions is stronger, because with personal pensions it is up to the individual pensioner to choose who manages that pension and in whom to place his or her trust?

Photo of Mr Tony Newton Mr Tony Newton , Braintree

There is certainly a wide range of advantages in money purchase schemes generally and in personal pension schemes in particular. The Government are trying to achieve, and have done so successfully, a wider spread of different kinds of opportunity for people to make provision for their retirement.

Photo of Mr Derek Enright Mr Derek Enright , Hemsworth

The Secretary of State will be aware that many of the assets of the pension fund of the Mirror Group are in the possession of the banks. Is he willing to order the banks to restore those assets, or will he let them get away with that bare-faced robbery?

Photo of Mr Tony Newton Mr Tony Newton , Braintree

The hon. Gentleman will realise that I have no power to order the banks to do anything. However, he will have noted the observations of some of the banks over the past few days. I cannot embroider on them or add to them.

Photo of Mr Tim Smith Mr Tim Smith , Beaconsfield

Is my right hon. Friend aware that his statement is most welcome, not only because it builds on the huge success of personal pensions but because it introduces for the first time the concept of an age-related rebate? Is not it clear that the hon. Member for Oldham, West (Mr. Meacher) is against variety in pension provision and against choice in pension provision and wants to destroy personal pensions? Not content with that, did not he make it clear when we debated occupational pensions in 1990 that he wanted to impose such huge burdens on occupational schemes that many employers would withdraw altogether?

Photo of Mr Tony Newton Mr Tony Newton , Braintree

That is absolutely clear. One of the remarks in that regard, about which the hon. Member for Oldham, West is no doubt proudest although I do not think that he has said it since, is his remark of 20 June 1990 that the Labour party planned to turn the pensions market on its head. That is a fine way of guaranteeing people security in retirement.

Photo of Dennis Skinner Dennis Skinner Member, Labour Party National Executive Committee

Is not the truth of the matter that the electors will be bewildered by a Government who reckon that they are strapped for cash and who will have a public sector borrowing requirement of £30 billion after the Budget but who are handing out £6 billion to a small group of people from the pockets of others? Who is going to benefit? Those who will benefit are the merchant banker Tory Members of Parliament, some of whom have spoken today, and insurance companies that give money to the Tory party so that it can fight elections. That is not only bribery; it is hypocrisy as well.

Photo of Mr Tony Newton Mr Tony Newton , Braintree

I think that the hon. Gentleman might study the whole package of changes that were made in 1988 to which he referred. He might also just remember that I have made it clear several times this afternoon that the net result of what I have set out, including the necessary adjustment of the basic contracted-out rebate, is not a large increase in expenditure.

Photo of John Greenway John Greenway , Ryedale

My right hon. Friend's statement will be warmly welcomed by the pensions industry which has been greatly concerned about the problem of older pension contributors opting back into SERPS because of the current arrangements. I doubt whether the pensions industry would have been as pleased with the hostility towards the industry shown by the Opposition.

On a technical point, I welcome my right hon. Friend's commitment to an age-related rebate in future. Will he ensure that, in due course, those provisions are taken together at the same time as his proposals for a state pension age which is the same for men and for women? The two will not work unless they are carried out together.

Photo of Mr Tony Newton Mr Tony Newton , Braintree

If my hon. Friend reads my statement carefully—it was admittedly a rather long paragraph—he will register that I have linked in one paragraph the action that will need to be taken in the wake of the Barber judgment in respect of occupational pension schemes, the action that will need to be taken following discussion on the state pension age, and the examination of age-related rebates. I certainly note my hon. Friend's point. He and many others will recognise that, if it is possible to find a way through more generally on age-related debates, it would be a significant further improvement in the whole structure of pension provision.

Photo of Mr Anthony Durant Mr Anthony Durant , Reading West

Does my right hon. Friend agree that the Government's pensions policy has encouraged many much younger people to take up pensions and those on much lower incomes to take out personal policies?

Photo of Mr Tony Newton Mr Tony Newton , Braintree

Yes. My hon. Friend is absolutely right. Personal pensions have proved particularly popular among young people with relatively modest incomes. Typically, the personal pension holder receives about three quarters of average earnings. Fifty per cent. of them are under 30 and 80 per cent. of them are under 40. As I said in my statement, I regard as one of the great merits of personal pensions the fact that large numbers of people who historically would not have been thinking ahead and planning for retirement—we all remember the old Pearl Assurance advertisement—have started to do so. That is a major gain.

Photo of Mr David Shaw Mr David Shaw , Dover

When my right hon. Friend was doing his most excellent research for his wonderful statement, which will be warmly welcomed by those with personal pensions, did he look at the Labour party policy document that proposes new controls on the way in which private pension funds and other moneys are invested? Does my right hon. Friend agree that such proposals would reduce investment returns for those with private pensions and that, in consequence, under a Labour Government, private pensioners would be very much worse off?

Photo of Mr Tony Newton Mr Tony Newton , Braintree

It must inescapably follow that the policy that my hon. Friend describes would have that effect. Of course, it would make very little difference to personal pensioners, because the Opposition would stop them having their personal pensions.